The Carbon Price Bogeyman

Why are we so afraid of carbon pricing? Whenever this topic is raised, people get tense, nervous, or outraged out of all proportion to the actual impact that putting a price on carbon would have for most of us.

A modest price on carbon, or greenhouse gas emissions, would have a very small direct impact on costs to homeowners and commercial buildings, and evidence exists that, in fact, by reducing consumption, carbon pricing reduces energy costs overall, which should make people happy.

Take a look at recent research on the Regional Greenhouse Gas Initiative, which encompasses 10 states in the Northeastern U.S. The region’s carbon pricing policy, implemented through a cap-and-trade system, shows significant energy conservation gains, AND the study concludes that energy customers in those states actually saved money on energy and saw an increase in economic activity and job creation.

That’s right, implementing a carbon pricing regime, in this case cap-and-trade, added $1.6 billion in economic value to the region by fostering investment in clean and efficient energy. Yikes! The sky is falling!

When I see results like this, it reminds me of the need to emphasize how a modest pricing intervention can have broad impacts. Tax Policy 101 reminds us that a good tax either raises revenues efficiently and equitably, or it changes behavior. In applying this principle to carbon pricing, I advocate that we consider raising money in order to organize capital to invest in transforming our energy systems.

The price signal needed to drive significant behavior change would be regressive in the short term (at least) and politically impossible to enact, and so we shouldn’t try. But if everyone pays just a little bit more, we can use the revenue to invest in programs that produce substantial social and economic benefits.

Modest carbon pricing doesn’t cost an individual household or commercial business very much, but it can generate sizable revenues to invest in efficiency or clean, renewable energy sources on their behalf. If we were to apply a simple, $10 per ton tax on residential energy use in Portland, for example, the cost to a homeowner might cost a bit more than $0.25 per day, which would add up to about $100 per year. Single-family households alone could aggregate $20 million a year for efficiency and clean energy programs.

These proceeds could leverage other resources and make meaningful investments that would go beyond what the large majority of homeowners could or would do on their own. Further, this approach would help raise awareness about the value of investing in clean, efficient energy, and may stimulate some small behavior change among energy users.

Recent experience backs this up. We can look at carbon taxes that have been established in North America – in British Columbia and Boulder, Colorado. In both cases, the sky hasn’t fallen and for the most part people are carrying on just fine. One recent, independent poll in British Columbia showed that a majority of the population supports keeping the tax (although a large majority indicate they do not support any further increases in the tax rate).

British Columbia’s tax is designed to be revenue neutral, by offering rebates in other taxes while ensuring this shift doesn’t create a net increase for people with lower incomes. Since enacted, the tax has raised about $850 million.

In Boulder, the voting public continues to show a real appetite for policy leadership. The City is undertaking a comprehensive review of the tax, enacted in 2006, and will be deciding its future later this year. One key result of five years with a carbon tax and the programs that have come with it is that Boulder citizens are now very engaged on energy issues, and this past election voters passed two ballet measures that could further enable that community to lead on the transition to clean, renewable energy.

Shi-Ling Hsu provides a very compelling argument in support of a tax in The Case for a Carbon Tax. Hsu makes the case that a tax would be an essential signal to energy markets, although I disagree with the notion that such a tax is simply a market signal. I think how the proceeds of a tax are used to invest in market transformation is central to why a tax worth considering now, and we should expect positive impacts, economically as well as on our energy use and carbon emissions.

I’d like to see communities in the Pacific Northwest become comfortable talking about carbon pricing as a serious driver of clean energy investment. We are struggling to mobilize capital now in a period of serious financial retrenchment. If many state and local governments, so desperate to find ways to invest in and support the shift to clean energy, could harness a small amount from everyone, they could help build something positive in these economic times. Would a community support strong action on energy for roughly the cost of an iPod per household? Shouldn’t we find out?

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